## _cr15325

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### EXECUTIVE SUMMARY — Background and request
- Madagascar’s economic recovery failed to gain momentum in 2015 owing to external shocks, persistent political instability, and weak governance.
- Projected real growth in 2015: around 3 percent (projected revised to 3.2 percent in detailed sections).
- Per capita GDP has stagnated; 2009–13 political crisis caused profound economic, social, and institutional costs.
- Authorities request second RCF disbursement: SDR 30.55 million (25 percent of quota).
- A Staff-Monitored Program (SMP) runs from September 2015 to end-March 2016 to build a track record for a potential future ECF arrangement.
- Staff supports the RCF request and the SMP as catalytic for donor financing and capacity building.

### Major economic developments and external sector
- Growth: 2015 growth projection revised to 3.2 percent (2014: 3.3 percent).
- Shocks:
  - World Bank estimates economic losses from cyclones/flooding: about 1.2 percent of GDP; reconstruction costs: about 2.8 percent of GDP (Text Table 1 / staff references).
  - Cyclones displaced 39,000 people; drought required food assistance to 200,000 people.
- Inflation: rose from 6 percent yoy in December 2014 to 7.5 percent in September 2015; projected around 7 percent in 2016.
- Exchange rate and reserves:
  - Market exchange rate depreciated 10.5 percent (yoy) in nominal effective terms at end-August.
  - Central bank discontinued buyback operations (ceased September 4, 2015).
  - Central bank sold around US$18 million in early-September and made cumulative purchases of about US$18 million from end-September to November 10.
  - International reserves projected to remain at about 2½ months of import coverage (below optimal ~3½ months from last Article IV).
- Current account: deficit declined to 0.2 percent of GDP in 2014; expected to widen in 2015 and likely to grow over the medium term to finance infrastructure imports.

### Fiscal policy, budget performance, and arrears
- Revenue and fiscal position:
  - Revenues reached 9.9 percent of GDP in 2014 (target in supplementary budget: 11.0 percent).
  - Revenue collections in 2015 rose 22 percent year-on-year through September (gross basis) but projected to reach only 9.9 percent of GDP in 2015 versus initial budget projection of 11.5 percent.
  - Overall fiscal deficit (commitment basis) 2014: 2.3 percent of GDP; 2014 cash deficit: 2.4 percent of GDP.
  - Overall fiscal deficit (commitment basis) projected in 2015: 3.3 percent of GDP excluding central bank recapitalization; projected 4.5 percent of GDP including recognition of old government debt owed to central bank.
  - Cash-basis deficit that needs financing in 2015 rises to 5.3 percent of GDP considering arrears clearance.
  - Projected deficit (commitment basis) in 2016: 3.2 percent of GDP.
  - To finance 2016 budget, external financing not yet identified equivalent to 2 percent of GDP (roughly US$200 million).
- Budget revisions and key line-item differences (selected, Difference = Revised vs. Original where provided):
  - Wages and salaries: 1,775 vs 1,647 = -7 (MGA billion)
  - Goods and services: 261 vs 167 = -36
  - Social sectors (of which goods and services): 108 vs 76 = -30
  - Transfers and subsidies: 844 vs 1,008 = 19
  - JIRAMA (of transfers): 85 vs 179 = 11
  - Civil Service Pension Funds: 150 vs 250 = 67
  - Interest charges: 343 vs 250 = -27
  - Domestically-financed investment: 422 vs 179 = -58
  - Foreign-financed investment: 868 vs 1,204 = 39
  - Arrears clearance: 118 vs 229 = 94
  - TOTAL: 4,631 vs 5,025 = 9
- Arrears: mixed progress; repayment plan with most tax creditors in 2014, but new arrears on VAT refunds and payments to JIRAMA’s suppliers accumulated in late 2014 and 2015.
- Authorities negotiating settlement of arrears via treasury bills; IMF TA on arrears management underway.

### Monetary policy, central bank reforms, and financial sector
- Monetary and liquidity conditions:
  - Strong money growth in 2015 but liquidity tight for most banks.
  - Reserve requirement reduced from 15 percent to 13 percent in October 2015 (text notes cut off).
  - One-year T-bill interest rates reached 12 percent in a constrained market.
  - System segmentation: three banks hold nearly 80 percent of liquidity; bank holdings of T-bills fell from 3.2 percent of GDP at end-May 2015 to 2.5 percent at end-September 2015.
- Central Bank measures and governance reforms:
  - Central bank recapitalized in June 2015 by government settling overdue interest payments equal to 0.4 percent of GDP.
  - Revisions to Central Bank Act planned to:
    - (i) gradually reduce statutory advances to government;
    - (ii) automatically transfer central bank losses and profits to the government;
    - (iii) establish an Audit Committee of the Board of Directors.
  - Government to compensate central bank for 2011–13 losses by issuing securities worth 0.8 percent of GDP.
  - Central bank to adhere to IFRS starting in 2016.
  - Continuous benchmark: refrain from reintroducing buyback operations at non-market rates; temporary 100 percent surrender requirement for exporters to expire end-December 2015.
  - CBM publishing daily minimum and maximum exchange rates since September and increasing exchange rate reporting (Table 1 reporting requirements).
- Financial sector priorities:
  - Joint IMF/World Bank FSAP underway to guide reforms.
  - Financial soundness: capital adequacy comfortable; sector profitable; deposits exceed loans for system as whole.
  - MFIs growing rapidly and many are financially fragile; supervision of MFIs to be strengthened.

### Inclusive growth, investment strategy, and social protection
- NDP and investment planning:
  - NDP 2015–19 and Presidential Plan of Urgent Action (PPUA) 2015–16 approved; implementation plan finalized in June 2015.
  - Steering committee on investment priorities established March 2015; prioritized investment plan to be completed shortly (priority investment plan completion target end-of-October 2015 noted).
  - Full NDP implementation requires substantial public investment financed partly externally and partly through domestic revenue mobilization, implying a protracted balance of payments need.
- Social policy:
  - Cabinet approval of National Social Protection Policy targeted by end-December 2015 (benchmark).
  - Increase budget for anti-corruption agencies by 50 percent in the 2016 budget.
- Sectoral priorities:
  - Agriculture: generates about 26 percent of GDP; main income for about 63 percent of households. Measures include roads, irrigation, seeds research, and expansion of social protection for subsistence farmers.
  - Education and health: expand programs for households with children, teacher training, and pilot mutual insurance for health access.
- PPPs and infrastructure:
  - PPP law to be submitted to parliament by end-December 2015 (benchmark).
  - List of potential PPPs identified; policy and legal framework for PPPs planned by end-December 2015.

### Program design: SMP, monitoring, and conditionality
- SMP coverage: September 2015–end-March 2016; monitored by quantitative targets and structural benchmarks (MEFP Tables 1 and 2).
- Key program targets and ceilings (selected):
  - Floor on net foreign assets (NFA) of BCM (millions of SDRs): End-Dec. 2015 Proj. 416; End-March 2016 Proj. 407 (as reported in Table I.1 formatting).
  - Ceiling on net domestic assets (NDA) of BCM: End-Dec. 2015 Proj. 1,558; End-March 2016 Proj. 1,485.
  - Ceiling on net bank credit to the government (MGA): 340 (End-Dec. 2015) and 90 (End-March 2016) as formatted in Table I.1.
  - Floor on social priority spending and gross tax revenue shown in Table I.1 (e.g., Floor on gross tax revenue: End-Dec. 2015 Proj. 2,994; End-March 2016 Proj. 746).
  - Memorandum: Program exchange rate (MGA/SDR) 3,761.88.
- Continuous ceilings include:
  - Zero-ceiling on CBM buyback operations at non-market rates (effective September 4, 2015).
  - Ceilings on new nonconcessional external debt (both > one year and ≤ one year maturities).
- Prior actions and structural benchmarks (selected):
  - Prior action: Submission of draft revisions to the 2015 budget and draft 2016 budget to parliament with revenue measures (prior action).
  - End-December 2015: Set up remote audit teams for ex-post verifications.
  - Continuous benchmark from end-Dec. 2015: Implement automatic pricing formula for full cost-recovery fuel prices.
  - January 1, 2016: Create escrow account at Central Bank to ring fence VAT reimbursements.
  - End-December 2015: Submit revised Central Bank Act to Cabinet for approval.
  - End-March 2016: Bring DMFAS into full operation and publish public and publicly-guaranteed debt stock and flows.

### Debt sustainability (DSA) — findings and risks
- DSA classification: Madagascar moved from ‘low’ to ‘moderate’ risk of debt distress (DSA, Appendix 2); deterioration mainly due to greater than anticipated exchange rate depreciation.
- Total public debt levels and composition (end-2014, selected):
  - Total PPG debt: US$3,574 million; 35.1 percent of GDP.
  - Domestic debt: US$1,217 million; 11.4 percent of GDP.
  - External debt: US$2,357 million; 23.7 percent of GDP.
  - Multilateral creditors: US$1,854 million; 18.7 percent of GDP.
- DSA baseline projections (selected macro assumptions):
  - Real GDP growth: 2015: 3.2; 2016: 4.3; 2017: 4.4; 2018: 4.5; 2019: 4.7; medium term stabilizes at 5 percent.
  - Non-interest current account deficit (percent GDP): 2015: 1.5; 2016: 1.5; 2017: 1.8; 2018: 3.1; 2019: 3.3; medium term: 3.0–3.5 percent.
  - Primary deficit (percent of GDP): 2015: 3.5; 2016: 1.9; 2017: 3.6; 2018: 2.9; 2019: 2.7.
  - Total revenues (percent of GDP): 2015: 15.9; 2016: 15.4; 2017: 17.4.
- Stress tests and vulnerabilities:
  - One-time 30 percent depreciation shock would cause PV debt-to-GDP to peak at 32 percent (above the 30 percent CPIA threshold) and PV debt-to-revenue to peak near 249 percent (threshold 200 percent).
  - Main downside risks: weak revenue performance and low donor grant support.
- Staff recommendation: increase domestic revenue collections; ensure concessional financing where possible; limit and carefully manage any non-concessional borrowing (SMP includes a non-concessional borrowing ceiling of US$200 million, commitment basis).

### Program risks, capacity building, and technical assistance
- Major program risks (selected):
  - Political uncertainty and disappointing progress in fighting corruption (Relative Likelihood: High; Potential Impact: High).
  - Larger-than-anticipated transfers to SOEs (JIRAMA and Air Madagascar) (Relative Likelihood: High; Potential Impact: High).
  - Failure to secure projected external financing in 2015.
  - Natural disasters (cyclones, floods, droughts) (Relative Likelihood: Medium; Potential Impact: Medium).
- Capacity-building priorities:
  - Strengthen tax and customs administration, public financial management, central bank capacity, and SOE governance.
  - IMF, World Bank, AfDB and others providing TA; ongoing FSAP to guide financial sector TA.

### Key policy recommendations and actions (staff emphasized)
- Increase domestic revenue collections and effectively sanction tax evasion.
- Improve quality of spending by reducing transfers to loss-making SOEs and eliminating inefficient fuel subsidy; implement automatic price formula for fuels.
- Avoid buildup of new arrears and settle existing arrears expeditiously; create escrow account for VAT reimbursements from January 1, 2016.
- Strengthen governance, cut corruption, and improve business climate; increase budget for anti-corruption agencies by 50 percent in 2016.
- Mobilize external concessional financing where possible; limit size and lengthen maturity of any non-concessional borrowing and submit PPP law to parliament by end-December 2015.
- Central Bank reforms: phased elimination of statutory advances (down to 5 percent of ordinary revenues starting 2018, objective elimination by 2024), migration to IFRS from 2016, and establishment of Audit Committee.

### Selected program quantitative and reporting figures (exact figures preserved)
- RCF disbursement requested: SDR 30.55 million (25 percent of quota).
- Program exchange rate (MGA/SDR): 3,761.88.
- Buildup in gross foreign assets targeted to reach SDR 597 million by end-2015.
- Non-concessional borrowing ceiling in SMP: US$200 million (commitment basis).
- CBM floor on net foreign assets (NFA) in Table I.1: End-Dec. 2015 Proj. 416 (millions of SDRs); End-March 2016 Proj. 407.
- NDA ceiling (CBM): End-Dec. 2015 Proj. 1,558; End-March 2016 Proj. 1,485.
- Gross tax revenue floors in Table I.1: End-Dec. 2015 Proj. 2,994; End-March 2016 Proj. 746 (monetary units as reported in source table).
- Central Bank recapitalization: government settled overdue interest payments equal to 0.4 percent of GDP in June 2015; government to issue securities totaling MGA 214 billion with a 20 year maturity and a 2.25 percent interest rate by end-December 2015 to settle outstanding obligations.

*Source: _cr15325 (IMF staff report excerpts and associated MEFP, Letter of Intent, and DSA; staff mission September 9-23; November 4, 2015).*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Background and context
- Madagascar’s economic recovery failed to gain momentum in 2015, due largely to external shocks, persistent political instability, and weak governance.
- Authorities have implemented an adequate policy mix that has broadly maintained macroeconomic stability, but current growth and investment outcomes are insufficient to make significant progress in improving social conditions.
- Increased revenue and external financing are needed to meet large infrastructure and social needs; balance of payments needs remain both urgent and protracted.
- Projected real growth in 2015 is around 3 percent, roughly the same as 2014 and equivalent to population growth; per capita GDP has stagnated.
- The economic, social, and institutional costs of the 2009-13 political crisis were profound—per capita incomes fell, social indicators worsened, and governance measures deteriorated sharply.
- Local elections were held in July 2015, opening the way for the formation of the Senate and other institutions.

### Request and program tools
- Authorities request a second disbursement under the Rapid Credit Facility (RCF) of SDR 30.55 million, or 25 percent of quota, to meet balance of payments needs. This follows a first RCF disbursement in June 2014.
- A Staff-Monitored Program (SMP) running from September 2015 to March 2016 will guide policy implementation and establish a stronger track record to support a potential future Extended Credit Facility (ECF) arrangement.
- The ongoing Financial Sector Assessment Program (FSAP) will guide future Fund engagement.

### Main policy commitments
- Unified the official exchange rate with the market rate by discontinuing buyback transactions that had influenced the official rate.
- Reforms to increase revenue generation, improve the quality of spending (including reforming public enterprises), and strengthen central bank capacity.
- The draft 2016 budget submitted to parliament is anchored by credible revenue and expenditure measures to support development priorities while reducing financing needs.

### Staff’s view
- Staff supports the authorities’ request.
- The package of measures in the attached letter of intent represents a considerable effort.
- The RCF disbursement combined with the SMP would supplement authorities’ policy efforts, help catalyze additional donor financing, and assist in building capacity and a track record to support a medium-term program.

*November 4, 2015*

### Economic developments and policy performance — summary findings

- Macroeconomic stability maintained despite shocks; inflation in single digits and import coverage of international reserves projected to rise somewhat.
- Fiscal and current account deficits remain compatible with medium-term sustainability.
- Authorities began implementing measures to improve revenue generation, quality of fiscal spending, central bank operations, and foreign exchange market functioning.
- National Development Plan (NDP) implementation plans finalized in June 2015 to increase spending on infrastructure and social development; meeting these needs requires improved revenue collection and gives rise to a protracted balance of payments need.

A. Real economy and external sector
- Growth projections for 2015 revised down to 3.2 percent, compared to 3.3 percent in 2014.
- External shocks (falling commodity prices, cyclones, droughts) hit mining and agriculture; power outages and Air Madagascar disruptions hurt output and tourism.
- Private investment restrained by structural problems, weak business climate, and political uncertainty.
- Consumer price inflation rose from 6 percent yoy in December 2014 to 7.5 percent in September 2015, driven by higher rice and charcoal prices.
- Current account: after declining to 0.2 percent of GDP in 2014, the deficit is expected to widen in 2015 due to low tourism receipts, increased dividend outflows, and lower budget support grants; deficits likely to grow over the medium term to finance infrastructure imports.
- Foreign exchange market pressures increased: the market exchange rate had depreciated 10.5 percent (yoy) in nominal effective terms at end-August.
- Central bank discontinued buyback operations in early September; temporary 100 percent surrender requirement for exporters enacted in August; central bank sold around US$18 million in early-September.
- International reserves projected to rise slightly in 2015 but remain at about 2½ months of import coverage (below the optimal level of about 3½ months from the last Article IV assessment).
- Weather shocks: World Bank estimates economic losses of about 1.2 percent GDP from cyclones and flooding; reconstruction costs estimated at about 2.8 percent of GDP (Text Table 1).
- Disaster-relief institutions underfunded relative to recurrent climatic shocks.

B. Fiscal policy
- Revenues rose in 2014 compared to 2013 but fell short of projections: reached 9.9 percent of GDP versus a target of 11.0 percent in the supplementary budget.
- Financing pressures in 2014 arose from revenue shortfalls, delays in donor financing, arrears repayments, and unanticipated spending needs (notably SOEs and civil service pension funds).
- Authorities responded by cutting other spending (delaying civil service recruitment and domestically financed investment), expanding the float (accounts payable), and increasing statutory advances from the central bank (for 1.4 percent of GDP), transferring financing pressures to 2015.
- Overall deficit in 2014 was 2.3 percent of GDP on a commitment basis; 2014 cash deficit was 2.4 percent of GDP (compared to 3.5 percent envisaged in the supplementary budget).
- 2015 budget targeted ambitious revenue increases and savings in subsidies and transfers to SOEs; fiscal reforms gained momentum but results did not fully materialize, prompting curtailment of other planned spending to preserve macroeconomic stability.
- Spending appropriations reduced for goods and services (including social sectors) and domestically-financed investment (Text Table 2: key revisions compared to the revised budget include:
  - Wages and salaries: Difference (MGA billion) 1,775 vs 1,647 = -7
  - Goods and services: 261 vs 167 = -36
  - Of which: Social sectors: 108 vs 76 = -30
  - Transfers and subsidies: 844 vs 1,008 = 19
  - Of which: JIRAMA: 85 vs 179 = 11
  - Air Madagascar: 0 vs 28 = -
  - Civil Service Pension Funds: 150 vs 250 = 67
  - Interest charges: 343 vs 250 = -27
  - Domestically-financed investment: 422 vs 179 = -58
  - Foreign-financed investment: 868 vs 1,204 = 39
  - Central bank recapitalization: 0 vs 340 = -
  - Arrears clearance: 118 vs 229 = 94
  - TOTAL: 4,631 vs 5,025 = 9 (Sources: Malagasy authorities and IMF projections))
- Arrears: mixed progress; repayment plan with most tax creditors in 2014, but additional arrears on VAT refunds to exporters and payments to JIRAMA’s suppliers accumulated in late 2014 and 2015.
- Authorities negotiating settlement of arrears via treasury bills and developing a framework to manage and prevent recurrence of arrears (IMF technical assistance underway).
- Authorities seeking to reduce reliance on central bank financing by reducing stock of statutory advances at end-December 2015.
- Progress on PFM priority action plan 2014-15: census of public agencies and preparation of outstanding Budget Report Acts covering 2008-11 for submission to parliament.
- Revenue collections in 2015 rose 22 percent year-on-year through September (gross basis) but are projected to reach only 9.9 percent of GDP in 2015 versus an initial projection of 11.5 percent in the budget.
- Revenue performance weighed down by slower-than-projected growth in imports and the economy, especially mining; tax and customs administrations implementing measures to deter fraud, recover tax arrears, improve controls and verifications, and reduce exemptions (MEFP ¶11).
- Structural obstacles: regulatory constraints on tax and customs administration and weaknesses in judicial processes limit reform implementation.

C. Monetary and financial sector policies
- Strong money growth in 2015 but liquidity conditions tight for most banks (Table 7).
- Fiscal deficit financing through statutory advances from the central bank accelerated base money growth in late 2014.
- Banks increased lending to the private sector and holdings of T-bills in the first half of 2015; in second half of 2015 liquidity became constraining for most banks.
- System highly segmented: three banks (out of eleven) hold nearly 80 percent of liquidity.
- Liquid banks have binding internal risk management limits constraining participation in T-bill market, leading to limited demand and higher interest rates (reaching 12 percent on one-year T-bills).
- In response, central bank in October reduced reserve requirement from 15 percent to 13 percent and reduced the reference interst rate (text cuts off here).

D. Inclusive growth and investment
- Large infrastructure and social development needs identified under the NDP; financing them requires improved revenue collection and external financing, implying a protracted balance of payments need.
- Private investment remains restrained by structural problems, weak business climate, and political uncertainty.

### Outlook, policy discussions, and program design
- The requested RCF disbursement is intended to help fill balance of payments financing gaps, catalyze donor support in 2015 and 2016, and avoid disruptive financing shortfalls.
- SMP (September 2015–end-March 2016) intended to guide policy implementation, develop implementation capacity, and build a stronger track record to support a medium-term ECF program.
- Given outcomes in 2014 and 2015, authorities have not yet sufficiently demonstrated capacity to strengthen policies significantly and ensure adequate financing required for a medium-term program; SMP aims to address this gap.
- RCF and SMP expected to have catalytic effects on bilateral and multilateral financial assistance in 2015 and 2016.

### Program risks and capacity building (high-level)
- Deep-rooted challenges in a fragile country: political instability, weak governance, regulatory constraints, and judicial weaknesses that impede revenue and structural reforms.
- Urgent and protracted balance of payments needs and a low level of international reserves increase vulnerability.
- Capacity-building priorities include strengthening tax and customs administration, public financial management, central bank capacity, and SOE governance.

*Republic of Madagascar — Executive Summary (staff mission visit: September 9-23; mission team led by Messrs. Mills, Engstrom, and Matz; visit included President Rajaonarimampianina and senior officials).*

### 9.5 percent to 8.7 percent (the first adjustment since 2004, see Figure 5).

### _cr15325 - 9.5 percent to 8.7 percent (the first adjustment since 2004, see Figure 5).

### Strengthening central bank capacity and monetary operations
- Revisions to the Central Bank Act are being developed to:
  - (i) gradually reduce central bank statutory advances to the government;
  - (ii) automatically transfer central bank losses and profits to the government;
  - (iii) establish an Audit Committee of the Board of Directors.
- Deposit auctions and sales of treasury bills were reintroduced to improve liquidity management.
- The central bank was recapitalized in June 2015 by the government settling overdue interest payments equal to 0.4 percent of GDP.
- In September the central bank began reporting daily minimum and maximum exchange rates for transactions, in addition to the average exchange rate.
- New investment guidelines and a new directive on reserve management were approved.
- A joint IMF/World Bank Financial Sector Assessment Program (FSAP) is underway.
- Planned legal and operational actions:
  - Submit a revised Central Bank Act for Cabinet approval by end-December 2015 (benchmark, MEFP Table 2) to tighten limits on financing to the government and reinforce governance and management.
  - Government will compensate the central bank for losses made during 2011-13 by issuing securities worth 0.8 percent of GDP.
  - Central bank to adhere to International Financial Reporting Standards (IFRS) starting in 2016.
  - Refrain from reintroducing buyback operations (continuous benchmark, MEFP Table 2); limit interventions to gradual accumulation of foreign exchange reserves.
  - Temporary 100 percent surrender requirement introduced in August will expire at end-December 2015.
  - Central bank will progressively focus on keeping inflation in single digits and building adequate reserves; with IMF technical support, work toward explicit bank liquidity targets and actively use Treasury bill sales, deposit auctions, and credit auctions.
  - Central bank’s reference (policy) interest rate will be adjusted more frequently to signal movements in the money market.
- Financial market context and constraints:
  - Inter-bank market remains nascent; liquid banks reluctant to lend due to persistent uncertainty, high counter-party risk, and weak legal recourse.
  - Bank holdings of T-bills fell from 3.2 percent of GDP at end-May 2015 to 2.5 percent at end-September 2015.
  - Enhancing the efficiency of the interbank market is important, as its segmentation complicates monetary policy and government financing.
- Financial soundness indicators:
  - Capital adequacy ratio is comfortable despite a slow decline with a brisk recovery in private sector credit.
  - Banking sector enjoys high profitability; deposits exceed loans for the system as a whole.
  - Microfinance institutions (MFIs) are growing rapidly; many are financially fragile, with an aggregate balance sheet very small relative to commercial banks.

### Inclusive growth, investment strategy, and social protection
- Strategy and planning:
  - Implementation plan for the National Development Plan (NDP) and the Presidential Plan of Urgent Action (PPUA) finalized in June 2015; will be foundation for a donor conference planned for 2016.
  - Full NDP implementation will require substantial public investment financed partly externally and partly through domestic revenue mobilization.
  - Steering committee on investment priorities established in March 2015; prioritized investment plan to be completed shortly.
- Near-term SMP focus:
  - Strengthen foundation for investment and social protection policies (MEFP ¶23-26, ¶34).
  - Investment plans emphasize infrastructure and social spending, relying largely on external borrowing on concessional or near concessional terms.
- Key policy actions and benchmarks:
  - Bring the DMFAS database into full operation and publish details on the stock and flows of public and publicly-guaranteed debt by end-March 2016 (benchmark, MEFP Table 2).
  - SMP includes a non-concessional borrowing ceiling of US$200 million, commitment basis.
  - Submit a law on public-private partnerships (PPPs) to the parliament by end-December 2015.
  - Cabinet will approve the National Social Protection Policy by end-December 2015 (benchmark, MEFP Table 2).
  - Improve regulation and supervision of MFIs; FSAP to examine this further.
- Social and governance measures:
  - National Anti-Corruption Strategy adopted in September 2015 with actions including strengthening the judiciary and sanctions system, increasing communication about corruption, coordinating international support, setting aside sufficient fiscal resources, and mobilizing the population.
  - Initiate evaluation of the effectiveness of the current sanction system, including the Conseil de Discipline de la Fonction Publique, by end-March 2016.
  - Increase the budget for agencies dedicated to fight corruption by 50 percent in the 2016 budget.

### Outlook, growth prospects, and fiscal strategy
- Growth projections and drivers:
  - Economic growth is projected to accelerate somewhat in 2016 to 4.3 percent.
  - Growth drivers: rebound in agricultural production; modest recovery in textile exports (including to the US following the restoration of AGOA trade privileges in 2015); slight increase in infrastructure investment partly financed by donors and public private partnerships.
  - Risks: slippages in reform implementation (particularly fiscal policy and SOEs), natural disasters (may be heightened by the El Niño weather pattern), political uncertainty, disappointing progress in fighting corruption.
- Fiscal policy goals and revenue measures:
  - Overall fiscal policy goal: create additional fiscal space needed for NDP implementation; top priority is reversing the trend of falling revenues relative to GDP through tax policy and administration changes.
  - Administrative measures launched in 2015: strengthen customs control procedures (including setting up remote audit teams for ex-post verification), recover tax arrears, limit abuse of exemption rules (benchmark, MEFP Table 2).
  - Draft revisions to the 2015 budget and draft 2016 budget introduce tax policy initiatives (prior action, MEFP Table 2): increased excise duties on beverages; a new tourist arrival fee of US$25 per visitor; limiting sales by Economic Processing Zones companies to domestic market and subjecting them to customs duties and taxes (benchmark, MEFP Table 2).
  - Budget targets an increase in the collection of tax revenues of ½ percent of GDP in 2016.
  - A review of the institutional framework for mining and petroleum activities and their taxation to be completed by end-2015 (MEFP ¶15-16).
- Spending composition and arrears:
  - Eliminate fuel price subsidy via adoption of an automatic pricing formula to maintain full cost-recovery fuel prices from end-December 2015 (continuous benchmark, MEFP Table 2).
  - Specific reform strategies for JIRAMA and Air Madagascar with World Bank assistance.
  - Budget transfers to pension funds to be addressed through a clean-up of pension rolls and parametric pension reforms.
  - Establish a framework to define, identify, and monitor arrears on expenditure of the central government and key SOEs by end-December 2015.
  - Create an escrow account at the Central Bank to ring fence resources required by VAT reimbursements starting January 1, 2016 (benchmark, MEFP Table 2).
  - Implementing a PFM reform agenda covering 2014-15 is continuing.
- Fiscal balance and financing needs:
  - Overall fiscal deficit (commitment basis) projected at 3.3 percent of GDP in 2015, excluding the central bank recapitalization.
  - The 2015 deficit (commitment basis) is projected to be 4.5 percent of GDP including the recognition of old government debt owed to the central bank.
  - Considering ongoing arrears clearance, corresponding deficit on a cash basis that needs to be financed rises to 5.3 percent of GDP.
  - Projected deficit (commitment basis) in 2016 is 3.2 percent of GDP.
  - To finance the 2016 budget, the authorities need external financing not yet identified equivalent to 2 percent of GDP (roughly US$200 million).
  - Residual financing needs expected to be met by an external bank loan on commercial terms to be signed shortly.
  - The 2016 financing gap does not yet take into account any programmatic budget support loans; in 2015 Madagascar received about 1 percent of GDP in programmatic budget loans.
- Debt and debt management:
  - SMP measures to maximize benefits and manage risks from external borrowing include bringing DMFAS into operation, a non-concessional borrowing ceiling of US$200 million, and submission of PPP law by end-December 2015.
  - Debt Sustainability Analysis (DSA) indicates Madagascar moved from ‘low’ to ‘moderate’ risk of debt distress (DSA, Appendix 2); deterioration mainly due to greater than anticipated exchange rate depreciation.
  - Weak revenue generation remains the greatest source of risk to debt sustainability.
  - Madagascar’s capacity to repay the Fund remains adequate (Table 10).

### Program design, risks, capacity building, and FSAP
- SMP coverage and monitoring:
  - The SMP covers a six-month period, September 2015 through March 2016, monitored by quantitative targets and structural benchmarks (MEFP, Tables 1 and 2).
  - Targets include ceilings on accumulation of new external payment arrears, external borrowing on non-concessional terms, central bank’s net domestic assets, net bank credit to the government, and floors on the central bank’s net foreign assets, social priority spending, and gross tax revenue.
- Major program risks:
  - (i) Political uncertainty and disappointing progress in fighting corruption that could reduce reform implementation, economic confidence, donor support, and tourism earnings.
  - (ii) Need for additional transfers to cover losses in JIRAMA and Air Madagascar.
  - (iii) Failure to secure all projected external financing in 2015.
  - If these events materialize, priority investment and social spending could be crowded out and additional domestic arrears might accumulate.
- Capacity building and technical assistance:
  - TA missions from the IMF, World Bank, African Development Bank, and others have focused on near-term, quick impact measures to improve revenue generation, public financial management, and central bank operations.
  - Ongoing FSAP will set the stage for increased TA on financial sector issues over the next year.
  - Last safeguards assessment completed in January 2015; CBM has taken or is planning steps to address priority recommendations on legal framework, transparency, and audit quality.

### Staff appraisal, support, and recommended financing
- Staff observations and assessments:
  - Madagascar’s economic recovery slower than expected due to external shocks and structural problems; falling world commodity prices, weather-related shocks, political uncertainty, poor governance, and weak institutions have restrained private investment and slowed reforms.
  - Authorities have preserved single-digit inflation and import coverage of international reserves despite shocks.
  - Fiscal and current account deficits remain compatible with medium-term sustainability; real exchange rate depreciated modestly and is broadly aligned with fundamentals.
  - Need to curtail spending plans owing to weak revenue collections, larger-than-budgeted transfers to SOEs, and binding limits on central bank financing.
  - Progress on arrears clearance mixed due to tight budget constraints.
- Policy priorities emphasized by staff:
  - Increase domestic revenue collections and effectively sanction tax evasion.
  - Improve quality of spending by reducing transfers to loss-making SOEs and eliminating inefficient fuel subsidy.
  - Avoid build-up of new arrears and settle existing stock expeditiously.
  - Strengthen governance, cut corruption, and improve the business climate.
  - Mobilize external concessional financing where possible; limit size and lengthen maturity of any non-concessional borrowing; establish sound legal framework for PPPs.
  - Minimize administrative measures restricting foreign exchange outflows and ensure full compliance with Article VIII obligations.
- IMF support and conditionality:
  - Staff supports the authorities’ request for a disbursement under the RCF in the amount of SDR 30.55 million (25 percent of quota), based on the policy track record over the past six months.
  - RCF disbursement, combined with the SMP, would supplement authorities’ policy efforts, help build reserves, and catalyze additional donor financing.
  - SMP provides opportunity to demonstrate a track record necessary for an ECF arrangement; qualifying for an ECF would require capacity to sustain reforms in key areas, especially revenue collections, economic governance, and management of SOEs.
  - Future Fund engagement will be guided by recommendations from the ongoing FSAP.

*Source: _cr15325 - 9.5 percent to 8.7 percent (the first adjustment since 2004, see Figure 5).*

### Box 1. Madagascar: Risk Assessment Matrix

### Box 1. Madagascar: Risk Assessment Matrix

### Domestic Risks
- Political uncertainty and disappointing progress in fighting corruption.
  - Relative Likelihood: High
  - Potential Impact: High: Reduced inflow of FDI and donor support. Reduced export earnings from tourism. Reduced implementation of reform and reduced fiscal space impeding delivery of public services.
  - Policy Response: Maintain exchange rate flexibility and reallocate fiscal spending to support of the most vulnerable. Encourage authorities and development partners to protect spending in priority social areas.

- Larger than anticipated transfers to SOEs (JIRAMA and Air Madagascar).
  - Relative Likelihood: High
  - Potential Impact: High: Reduced fiscal space would impede the government’s ability to deliver public services.
  - Policy Response: Protect key public services in budget. Encourage authorities and development partners to protect spending in priority social areas. Minimize accumulation of new arrears. Consider private management of specific units or operations.

### External Risks
- Structurally weak growth in the Euro Area.
  - Relative Likelihood: High
  - Potential Impact: High: Uncertain/slow donor support reduces fiscal space, impeding the ability to deliver public services. Slower growth in tourism.
  - Policy Response: Energize donor support through a concerted campaign emphasizing the merits and needs of the medium-term development plan; look within budget for ways to protect key public services. Maintain exchange rate flexibility. Diversify tourism markets.

- Cyclones, floods, and droughts.
  - Relative Likelihood: Medium
  - Potential Impact: Medium: Loss and damage of physical and human capital and lower growth.
  - Policy Response: Reallocate fiscal spending to finance recovery work and make appeal to donors for post-disaster financing. Build buffers and resilience.

- Sharp China slowdown in 2015-16
  - Relative Likelihood: Low
  - Potential Impact: Medium: Depressed prices of commodities, mainly nickel, reduces export earnings and tax revenue.
  - Policy Response: Maintain exchange rate flexibility and continue with revenue reforms to expand the local tax base.

### Note on the Risk Assessment Matrix
- The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of the IMF staff).
- The relative likelihood of risks listed is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent).
- The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly.

*Box 1. Madagascar: Risk Assessment Matrix (IMF staff).*

### Appendix I. Letter of Intent

### Appendix I. Letter of Intent

### Overview
- Request for IMF immediate support: disbursement under the Rapid Credit Facility (RCF) equivalent to 25 percent of quota, or SDR 30.55 million, to be disbursed to the Central Bank of Madagascar.
- Program framing:
  - Launch of a medium-term economic reform program aimed at durable poverty reduction and growth through increased investment and improved domestic revenue mobilization.
  - Request combines the RCF disbursement with a staff-monitored program (SMP) for the period end-September 2015 to end-March 2016, intended to lay groundwork for a multi-year program supported by the Extended Credit Facility (ECF).
- Commitments:
  - Government stands ready to take further measures as necessary and to consult IMF staff prior to adopting policy changes set forth in the Memorandum of Economic and Financial Policies (MEFP).
  - Central Bank of Madagascar committed to provide timely monitoring information and undergo a safeguards assessment update, if required.
- Publication: Malagasy authorities agree to publication of the LOI, the MEFP, the Technical Memorandum of Understanding (TMU), the IMF staff report related to the RCF request, and the Debt Sustainability Analysis, after Executive Board approval.

### Economic developments in 2014–2015
- Context and performance:
  - Recurring political instability has depressed development; average real GDP growth during 2009–13 crisis was ½ percent a year versus population growth of 2.8 percent a year.
  - 2015 growth projection revised downward to 3.2 percent.
- Shocks and damages:
  - Cyclones with heavy rains in early 2015 displaced 39,000 people.
  - Prolonged drought in the south required food assistance to 200,000 people.
  - Damage from cyclones and weather-related events estimated at 1 percent of GDP with reconstruction costs projected at close to 3 percent of GDP or US$270 million.
  - Tourism impacted by Air Madagascar disruptions including a month-long strike in July.
- Macroeconomic outcomes:
  - Fiscal and current account deficits remained compatible with medium-term sustainability; inflation remains in single digits.
  - Mining constrained by low commodity prices; agriculture affected by weather shocks.
  - Decline in fuel prices has reduced petrol import costs.
- Progress and constraints:
  - Measures undertaken in 2014–2015 supported macroeconomic stability but results on revenue mobilization and expenditure management have been below expectations due to institutional capacity and compliance constraints.
  - Larger-than-expected transfers to loss-making public enterprises (in particular JIRAMA and Air Madagascar) and underfunded pension funds continue to crowd out domestic capital spending.
  - Repayment schedule for previously accumulated domestic budgetary arrears agreed in 2014, but new arrears accumulated on VAT refunds and payments to JIRAMA’s suppliers.

### Policy measures and institutional reforms (implemented or underway)
- Policy framework:
  - National Development Plan (NDP) 2015–19 and Presidential Plan of Urgent Action (PPUA) 2015–16 approved; implementation plan (Plan de mise en œuvre, PMO) approved in June.
- Revenue mobilization and tax administration:
  - Customs: list of emergency measures to deter fraud, tightened controls at Toamasina port, increased ex post verifications.
  - Tax administration: enhanced controls and verifications, recovery of tax arrears, increased information sharing with customs.
  - Suspension of duties and taxes for petroleum imports (non-JIRAMA related) removed in March 2015.
- Public expenditure management:
  - Public payroll cleaned of ghost workers; JIRAMA steps to minimize operational losses.
  - Transfers to JIRAMA fell from 1.7 percent of GDP in 2014 to a projected 0.6 percent in 2015, aided by lower international fuel prices.
  - Implementation decree of law 2014-14 on public enterprises with commercial character issued to clarify state role.
- Fuel subsidies and prices:
  - Fuel prices increased three times between July 2014 and July 2015.
  - Cost of fuel subsidies cut from 0.4 percent of GDP in January-July 2014 to 0.1 percent for the same period in 2015.
- Central bank governance and operations:
  - Overdue interest payments owed to the central bank of about 0.4 per-cent of GDP settled by the government in June.
  - Central bank audited financial statements for 2010-13 published.
  - New investment guidelines approved in December 2014 and new directive on reserve management approved in February 2015.
  - Discontinued buyback operations at non-market rates in the interbank FX market since September; publishing daily minimum and maximum exchange rates in addition to the reference rate.
  - Weekly deposit auctions reintroduced in April to improve bank liquidity management.
- Investment planning and PPPs:
  - Steering committee on investment priorities established in March 2015 under the Prime Minister to develop a priority investment plan.
  - Exploration of public-private partnerships (PPPs) starting in 2015 for large infrastructure projects (example: Ivato airport expansion, transfer of a power plant to a private operator).
- Business climate improvements:
  - Regained eligibility for preferential access to US markets through AGOA.
  - Formal platform for public-private dialogue established; Economic Development Board of Madagascar (EDBM) restructured and rejuvenated.
  - Implementation decree for the Zone Franche adopted.

### Fiscal policy and debt management
- Fiscal strategy:
  - Fiscal policy to support PPUA and NDP implementation with increased spending on infrastructure, education, health care, and rural development.
  - Fiscal space to be created through tax policy adjustments, strengthened tax and customs administration, and expenditure reprioritization.
- Tax ratio and deficits:
  - Tax ratio (gross/net) estimated to increase from 10.1/9.9 percent of GDP in 2014 to around 11.0/10.4 percent of GDP in 2016.
  - In 2015, revenue gains expected to be partly offset by subdued activity and imports, leaving net tax ratio broadly unchanged from 2014.
  - Overall deficit on a cash basis projected at 5.3 percent of GDP in 2015.
  - The 2015 fiscal deficit includes recapitalization of the central bank and rescheduling of interest arrears equivalent to 1.2 percent of GDP.
- SMP targets:
  - For the staff-monitored program, targets will be set on net claims on government by the banking system (ceiling), gross tax revenue (floor), and priority social spending (floor).

### Revenue mobilization: measures and priorities
- Strategy:
  - Focus on strengthening revenue administration and taxpayer compliance in line with TA and TADAT findings.
  - Plan to restructure the tax administration and develop communication strategies to improve taxpayer services.
- Specific measures launched in September and October:
  - Stricter monitoring and auditing of declared value and nature of imports, especially consolidated load cargo.
  - Improved customs controls to limit abuse of exemption rules, including on imported rice and special regimes (EPZs, temporary imports).
  - Set up remote audit teams to undertake ex-post verifications focused on highly suspected fraud operations (benchmark, Table 2).
  - Recovery efforts for arrears on domestic taxes and customs duties and taxes.
  - Generation of a comprehensive list of tax exemption beneficiaries to cross-check against taxpayer database to identify fraudulent claims.
  - Strengthened joint committee coordination of customs and tax collection, including joint working groups to identify control targets.
  - Consideration of creating a tax policy coordination unit in 2016.

- Formalization and compliance:
  - Measures to bring informal activity into the formal sector since 2014: repression of sales without invoices, increased on-the-ground controls, improved taxation of forestry/mining/fisheries, harmonization of administrative values for property and second-hand vehicles transactions, stricter controls on VAT refund credits, recovery of tax arrears, and transfer pricing adjustments.
  - Abolition, effective end-December 2015, of all duty-free shops except those in international airport departure terminals.
  - Priority on enhancing tax audit efficiency via greater risk-based management.

### Customs administration reforms
- Near-term priorities:
  - Step up verifications and reduce fraud; increased container scanning at Toamasina since March 2015.
  - Set up ancillary team in Antananarivo for secondary follow-up verifications.
  - Mandatory packing lists for all containers; increased use of tablets during physical inspections to optimize database use.
  - Further securitization of port perimeters via greater electronic monitoring and surveillance cameras.
  - Acceleration of procedures for auction of unclaimed containers.
- Audit and valuation efforts:
  - Plan to double audits on declared value of imports from 6 to 12 percent.
  - Continued improvement of in-house database on reference import values and risk-management analysis starting with Toamasina port.
- Cross-agency collaboration:
  - Customs directorate developed an information sharing platform to enable automatic sharing of ASYCUDA data with the tax administration twice daily.
  - Joint training sessions initiated; 20 large enterprises identified for joint verifications in 2015 and annually thereafter.
  - Customs to act as collection agent for intermittent income tax to expedite processing.
  - Update of estimated tax exemptions and expenditures planned, with later extension from domestic taxes to customs.

### Natural resource sector contributions and legislative reforms
- Objective: ensure appropriate contribution of mining and petroleum sectors to fiscal revenue.
- Code modernization:
  - Working to modernize mining and petroleum codes to align with best practice and ensure consistency with the law on large mining investments (LGIM).
- Principal envisaged fiscal measures in new codes and Décret d’Application:
  - Increase in royalty rates and more differentiation by type of mineral.
  - Review of royalty revenue-sharing formula.
  - Simplification of corporate income tax regimes.
  - Tightening of thin capitalization rules.
  - Reduction in length of fiscal stability clauses.
- Institutional arrangements:
  - Joint committee set up including Ministry for Strategic Resources, chamber of mines, association of mining operators, and Ministry of Finance and Budget.
  - Plan to finalize draft laws with World Bank input, ensure compliance with international best practice, and submit to the National Assembly.
  - Plan to incorporate fiscal provisions of mining and petroleum codes into the General Tax Code through amendments by end of December 2015.
- Note: For large mining projects, length of fiscal stability remains as specified under the LGIM.

*Republic of Madagascar — Letter of Intent and attached Memorandum of Economic and Financial Policies (Appendix I).*

### 16.      Moreover, the institutional framework for mining activities will be revamped. In this

### _cr15325 - 16.      Moreover, the institutional framework for mining activities will be revamped. In this

### Mining sector institutional reform and gold policy
- Update status of 3,600 mining permits to redress irregularities following the 2009 moratorium.
  - 1,800 permits processed to date.
  - Anticipated completion of the update by end-of-March 2016.
- Decree adopted in April 2015 establishing a national gold agency (ANOR) responsible for:
  - Collecting gold mining royalties.
  - Administering permits for gold mining activities.
- Parallel measures:
  - Preparation of a decree lifting the ban on gold exports.
  - Set up of gold counters to purchase existing stocks of mined gold from individuals.
  - Central Bank and Ministry for Strategic Resources to jointly complete a feasibility study by the end of December-2015 for a public-private refining company to certify gold exported from Madagascar.

### Fiscal pressures, spending inefficiencies, and planned savings (2015–2016)
- Main budgetary pressures identified:
  - Fuel subsidies.
  - Transfers to state-owned enterprises including JIRAMA.
  - Underfunded civil service pension funds.
- Measures and expected savings in 2015 and 2016:
  - Cost savings from deferred recruitment due to insufficient absorptive capacity; prioritization of spending, including domestically-financed investment; reduction in the amount of fuel coupons (‘chèques carburants’) with a view to their elimination.
  - Elimination of the fuel price subsidy by end-of-December 2015 (noting it is falling with world market prices).
  - Introduction of an automatic pricing formula for maintaining full cost-recovery fuel prices (for diesel, gasoline, and kerosene) on January 1, 2016 (continuous benchmark, starting at the end of-December 2015, Table 2).
  - Temporary bus subsidy to cease at end-December 2016.
  - Strengthened oversight of state-owned enterprises (SOEs) to ensure compliance with implementation decree of law 2014-14 on public enterprises with commercial character (regular communication of financial results, independent control functions, fully accountable Boards).
  - Reform strategies developed for Air Madagascar and JIRAMA.
  - Two-pronged approach to underfunded pension funds:
    - Clean-up of pension rolls.
    - Parametric pension reforms supported by World Bank technical assistance in 2015 and 2016; planned implementation of parametric reforms by the end of 2016.
  - Extension of audit of civil service personnel and pay data to sectoral ministries:
    - First audit (started in 2015) identified 2,256 irregular workers and provided wage bill savings of MGA1.3 billion per month.
    - Installation of an electronic workforce planning platform (“Gestion Prévisionnelle des Effectifs, des Emplois et Compétences”) expected to be completed by December 2016, with support from the European Union.
    - Evaluation of the effectiveness of the current sanctions system, including the Conseil de Discipline de la Fonction Publique, to be initiated by the end of March 2016.
  - Objective: enhance civil service productivity and reduce the public sector wage bill as a proportion of GDP.

### 2016 budget priorities and revenue measures
- Budget objectives:
  - Consolidate 2015 policy efforts and introduce measures aligned with the NDP.
  - Increase revenues and protect local rice production.
- Revenue measures to be introduced in draft revisions to the 2015 budget and draft 2016 budget:
  - Elimination of the tax holiday on new companies.
  - Introduction of a uniform ten percent excise duty on all imported new vehicles.
  - Increase in excise duties on alcoholic beverages and soft drinks.
  - Ensure local sales of EPZ companies are restricted to 5 percent of total sales and subject to customs declaration and duties and taxes (benchmark, Table 2).
  - Introduction of a tourist arrival fee of US$25 per visitor.
  - Elimination of the exemption from import duties and taxes for imported cooking oil.
  - Reinforce filing of income tax declarations, including for incomes below MGA250,000.
  - Consideration of possible elimination of tax exemptions on imported rice, informed by a study on damage to local rice production to be completed by end-November 2015.
- Expenditure side:
  - Scale up expenditure in priority areas (agriculture, education, health and infrastructure) by at least 0.5 percent of GDP while preserving sustainability.
  - Continue to improve spending efficiency, introduce parametric pension reforms, and improve allocation of resources through a medium-term expenditure framework.
- Fiscal outcome target:
  - Overall fiscal deficit (commitment basis) of around 3 percent of GDP.
- Timeline:
  - Draft revisions to the 2015 budget and draft 2016 budget law incorporating these revenue measures to be submitted to the National Assembly by the end of October (prior action, Table 2).

### Public financial management (PFM) reform and arrears strategy
- PFM reform:
  - 2013 PEFA self-assessment highlighted need to strengthen public expenditure management.
  - Priority Action Plan for PFM for 2014-15 developed with IMF TA; substantial progress made and commitment to complete remaining actions.
  - 2015 priorities: improve expenditure prioritization (greater transparency and phasing-in multi-year budgeting), enhance public procurement, and strengthen payroll controls.
  - Additional TA requested; PFM reform strategy for 2016-20 being developed with African Development Bank support and to be approved by Cabinet.
- Arrears:
  - Significant stock of payment arrears since 2009 by central government and SOEs (including VAT refunds, petroleum distributor subsidies, direct payments by Government to JIRAMA suppliers).
  - Strategy to stop, from January 2016, emergence of arrears on new central government spending commitments for fiscal year 2016.
  - By December 31, 2015:
    - Finalize evaluation of the stock of arrears based on clear definition of maximum payment delays for main expenditure categories.
    - Implement reporting procedures and organization required to manage arrears.
  - Create an escrow account at the Central Bank to ring fence resources required by VAT reimbursements starting January 1, 2016 (benchmark, Table 2).
  - Treasury to instruct SOEs to report their arrears to suppliers and tax administration, starting by end-December 2015 with JIRAMA, Air Madagascar, and Madarail; exercise to be extended to all SOEs by the end of March 2016.
  - JIRAMA, Air Madagascar and Madarail required to have a plan for clearing their arrears by end of March 2016.

### SOE turnaround: JIRAMA and Air Madagascar
- JIRAMA financial turnaround and rehabilitation:
  - Comité Stratégique chaired by the Minister of Energy and Hydrocarbons established in March 2015 to guide restructuring.
  - Consultant hired to develop a management improvement plan including organizational restructuring; to be presented by November 2015.
  - Review existing legislation to include JIRAMA under commercial law provisions and increase penalties for electricity theft.
  - Strategy centered on reducing losses and identifying theft and fraud.
  - On-site audits of the 1,000 largest users to eliminate unmetered consumption (commercial losses) expected to be completed by the end of December 2015.
  - Investigating advanced metering for new customers; measures to reduce costs (rehabilitating heavy fuel oil generating units, auditing supplier contracts).
- Air Madagascar operational and financial restructuring:
  - Implement an “air access strategy” to spur domestic and international competition by mid-2016.
  - Company seeking strategic alliances and contracting external expertise with World Bank support to develop a new business plan (review tariff structure, fleet composition, staffing level, company structure).
  - Management and Board replaced after a month-long strike; new team auditing contracts and seeking additional revenue sources.
  - Objective: restore Air Madagascar’s operational profitability by end-2016.

### Infrastructure investment, prioritization, and PPPs
- Infrastructure needs:
  - Significant investment required in energy, roads, railways, seaports, and airports.
  - Limited domestic and international resources necessitate careful prioritization of projects.
- Priority investment plan:
  - Steering committee on investment priorities (led by the Prime Minister with Ministry of Economic Planning and Development and line ministries) to develop a priority investment plan specifying key projects and preliminary cost estimates.
  - Plan to be completed by the end of-October 2015.
- Public-Private Partnerships (PPPs):
  - List of potential PPPs identified aligned with the NDP.
  - Policy and legal framework for PPPs under preparation and planned to be enacted by the end of December 2015.
  - Plan to create a dedicated unit to control and manage PPPs at the Presidency by end-2015.
  - Commitment to minimize budgetary risks of PPP arrangements.

### Debt management and external financing strategy
- Legal and strategic framework:
  - Loi Régissant la Dette Publique et la Dette Garantie par le Governement Central (2014/12) ratified by National Assembly in August 2014.
  - Debt management strategy to be ready by no later than the end of March 2016, following development of priority investment project list and adoption of medium-term budgetary framework.
  - From the 2016 budget onwards, publication of anticipated stock and flows of central government’s public and publicly-guaranteed debt.
  - External debt database with UNCTAD support to be fully operational by the end of March 2016 (benchmark, Table 2).
- External financing approach:
  - Seek to meet external financing needs on concessional terms; Madagascar assessed to have a moderate risk of external debt distress and is vulnerable due to low revenue generation.
  - If concessional options exhausted, limited medium-term and long-term non-concessional borrowing could be considered for critical expenditure needs, with prior consultation with IMF and World Bank staff.
  - Avoidance of short-term external borrowing.
  - Explicit indicative targets set on non-concessional borrowing and short-term external borrowing for the staff monitored program.

### Monetary and exchange rate policy objectives and targets
- Policy aims:
  - Contain demand pressures, keep inflation in single digits, and build an adequate reserve buffer.
  - Give more significance to the reference interest rate and monetary policy operations.
- Targets and operational stance:
  - Explicit indicative targets for net foreign assets and net domestic assets set (as defined in the technical memorandum of understanding).
  - Buildup in gross foreign assets targeted to reach SDR 597 million by end-2015.
  - Pursue restrained monetary policy and strengthen liquidity management:
    - Engage in further TA to set explicit liquidity targets.
    - Use Treasury bill sales and weekly deposit auctions to achieve liquidity targets.
    - Allow the reference interest rate to fluctuate more and reflect money market movements.
- Exchange rate policy:
  - Maintain a flexible exchange rate to ensure orderly foreign exchange market conditions and facilitate external adjustment over the medium term.
  - CBM to focus interventions on gradual accumulation of gross foreign assets.
  - Refrain from reintroducing buyback operations at non-market rates in the interbank foreign exchange market (continuous benchmark, Table 2).
  - Reinforce trading protocols in the interbank market.
  - Minimize resort to administrative measures restricting foreign exchange outflows and ensure conformity with Article VIII obligations.

### Central Bank (CBM) governance, autonomy, and accounting
- Issues identified:
  - Financial autonomy of CBM challenged by significant statutory advances to government in 2014, petroleum subsidies in 2012-13, and uncollected accrued interest on government bonds.
- Planned measures:
  - Submit a revised Central Bank Act to Cabinet for approval by the end of December 2015 (benchmark, Table 2). The revised law will:
    - Include a phased elimination of statutory advances from the central bank as a source of domestic financing down to 5 percent of ordinary revenues starting in 2018, discontinuation of securitization of statutory advances, with objective of eliminating statutory advances by 2024 (consistent with guidance from SADC).
    - Provide an effective mechanism for automatic transfer of central bank losses and profits to the government.
    - Establish an Audit Committee of the Board of Directors and adopt a charter specifying roles/responsibilities for oversight of internal and external audit, financial reporting, and internal controls.
    - Establish an Executive Committee (Governor and two Deputy Governors) to propose policies to the Board and handle day-to-day operations.
  - Settle outstanding central government obligations owed to the central bank through issuance of interest-bearing instruments totaling MGA 214 billion with a 20 year maturity and a 2.25 percent interest rate by the end of December 2015.
  - Migration towards International Financial Reporting Standards (IFRS) starting with 2016 accounts, supported by TA.

### Financial sector development priorities
- Commitment to developing a strong, independent financial sector to support inclusive growth.
- Action plan to be finalized following completion of IMF–World Bank FSAP currently underway.
- Current focus pending FSAP completion:
  - Improve supervision of foreign-owned banks via memoranda of understanding with supervisors in banks’ home countries (primarily France, Mauritius, and Morocco).
  - Study prerequisites for a possible deposit insurance scheme.
  - Finalize a law regulating mobile banking in 2015.
  - Complete revision of the Financial Sector Law, including establishment of the stock exchange, in 2016.
  - Conduct study to improve legal/regulatory and institutional capacity for adequate supervision of the microfinance sector in cooperation with the World Bank.

*Source: Excerpt from the provided IMF staff report content.*

### 32.      National reconciliation calls for inclusive growth benefitting all citizens and all

### 32.      National reconciliation calls for inclusive growth benefitting all citizens and all regions of Madagascar.

### Inclusive growth and development objectives
- National Development Plan and Presidential Plan of Urgent Action (PPUA) underpin objective to mobilize full potential of Madagascar’s young and vibrant population and various sectors of the economy.
- Reforms required to:
  - (i) improve governance;
  - (ii) improve the quality of education and health services to strengthen the human capital base;
  - (iii) open up for a more decentralized administration;
  - (iv) create the framework for a sustainable exploitation of Madagascar’s abundant natural capital, while preserving our unique ecosystem for future generations.

### Governance, anti-corruption, and institutional reform
- Commitment to strengthen institutions to improve governance and create a foundation for private sector growth.
- Identified problems: corruption and weaknesses in the civil service, judiciary and security systems leading to inferior public service delivery and revenue collections well below expectations.
- Key elements to control corruption:
  - better regulatory system and enforcement;
  - well-defined boundaries on government power;
  - effective sanctions to reprimand corrupt behavior.
- Planned measures:
  - look to amend the civil service law;
  - initiate reforms to ensure a strong independent and impartial judiciary, including regular meetings of the Conseil Superieur de la Magistrature to oversee performance of individual magistrates;
  - efforts guided by the national strategy against corruption launched in 2014.
- Budgetary commitment: increased the budget allocation for the agencies dedicated to the fight against corruption by nearly 50 percent in 2016 with the objective of reaching 0.3 percent of the budget over time.

### Education, health, and social protection
- Broadening access to health care and education is a key policy objective.
- Education measures:
  - expand programs for households with children;
  - emphasize minimum job standards and training of teachers;
  - recruitment of community teachers (“Maitres FRAM”) based on qualifications and performance evaluation.
- Health measures:
  - plan to introduce mutual insurance on a pilot basis to make health services more accessible.
- Social protection:
  - develop social protection programs for the most vulnerable;
  - national social protection policy under preparation will guide design and implementation of social protection programs, including social safety nets for the poorest and most vulnerable households;
  - Cabinet approval target: End-December 2015 (benchmark, Table 2).

### Agriculture and rural development
- Agriculture importance:
  - generates about 26 percent of GDP;
  - main income for about 63 percent of households.
- Transformation goals:
  - move from subsistence farming to production for domestic, regional, and international markets;
  - reduce risks for the most vulnerable households.
- Planned support measures:
  - (i) increase investment in roads and irrigation infrastructure;
  - (ii) increase investment in schools and training focused on agriculture;
  - (iii) increase funding of research to develop seeds and agricultural techniques adapted to Madagascar;
  - (iv) expand social protection programs targeting vulnerable subsistence farmers.
- Land rights: local land offices with the right to issue land certificates will be established in all districts of the country by end-2018.

### Decentralization
- Decentralization reforms are essential to improve quality and access to public services and foster local development policies.
- Initial actions in 2015:
  - identify and define appropriate local government structures;
  - implement measures to strengthen local governance;
  - prepare the legal framework for the local civil service;
  - ensure coherence between legal and institutional frameworks for decentralization with local development plans and NDP objectives.

### Statistical policy and data improvements
- Commitment to produce more timely and accurate statistics.
- INSTAT actions with support from IMF and development partners:
  - preparing a provisional and revised series of national accounts based on the 1993 SNA for 2007-14;
  - develop satellite national accounts on mines, forests, tourism and water to be integrated in the national accounts in 2016.
- Census plans: intend to undertake a new population census in coming years, subject to availability of additional financing.
- CBM will continue to improve compilation of balance of payments and monetary statistics.

### Key indicative targets and program metrics (extracts)
- Table I.1. Madagascar: Indicative Targets 2015-16 (selected lines as reported):
  - End-Dec. 2015 Proj.  End-March 2016 Proj.
  - External
    - Ceiling on accumulation of new external 00 payment arrears (US$ millions) ¹
    - Ceiling on new nonconcessional external debt with original 200200 maturity of more than one year, contracted or guaranteed by the central government or BCM (US$ millions) ¹
    - Ceiling on new nonconcessional external debt with original 00 maturity of up to and including one year, contracted or guaranteed by the central government or BCM (US$ millions) ¹
  - Central bank
    - Floor on net foreign assets (NFA) of BCM (millions of SDRs) ²416407
    - Ceiling on net domestic assets (NDA) of BCM ²1,5581,485
  - Fiscal
    - Ceiling on net bank credit to the government ³34090
    - Floor on social priority spending ³20433
    - Floor on gross tax revenue ³2,994746
  - Memorandum items
    - Budget support grants and loans (millions of SDRs) 4 119119
    - New concessional loans, contracted or guaranteed by the central government or BCM (US$ millions) 5 167327
    - Program exchange rate (MGA/SDR)3,761.883,761.88
    - Recapitalization of the central bank for losses made214214 during 2011-13

### Prior actions and structural benchmarks (selected)
- From Table I.2. Madagascar: Prior Actions and Structural Benchmarks for RCF and SMP:
  - RCF: Strengthen fiscal policy implementation
    - Prior Action: Submission of draft revisions to the 2015 budget and draft 2016 budget to parliament with the revenue measures outlined in the MEFP (paragraph 18).
  - SMP: Improve exchange rate policies
    - Continuous benchmark: Refrain from reintroduction of buyback operations at non-market rates.
  - Mobilizing fiscal revenue
    - End-December 2015: Set up remote audit teams with the mission to undertake ex-post verifications focused on highly suspected fraud operations.
    - End-March 2016: Ensure that local sales of EPZ companies are restricted to 5 percent of total sales and that they are subject to customs declaration and duties and taxes.
  - Improving composition and quality of fiscal spending
    - Continuous benchmark from end-Dec. 2015: Implement an automatic pricing formula for maintaining full cost-recovery fuel prices (for diesel, gasoline, and kerosene).
    - January 1, 2016: Create an escrow account at the Central Bank to ring fence the resources required by VAT reimbursements.
  - Improving fiscal transparency
    - End-March 2016: Bring the DMFAS database into full operation and publish details on the stock and flows of public and publically-guaranteed debt starting with the 2016 budget law.
  - Strengthening independence of the central bank
    - End-December 2015: Submit Central Bank Act revised to incorporate the elements outlined in the MEFP (paragraph 30) to the Cabinet for approval.
  - Promoting inclusive growth
    - End-December 2015: Cabinet approval of the National Social Protection Policy to guide the design and implementation of social protection programs, including social safety nets for the poorest and most vulnerable households.

### Program methodology, aggregates, and definitions (selected)
- Indicative targets set for end-December 2015 and end-March 2016 include:
  - Floor on net foreign assets (NFA) of the Central Bank of Madagascar (CBM), stock at program exchange rates;
  - Ceiling on net domestic assets (NDA) of CBM, stock at program exchange rates;
  - Ceiling on net bank credit (NBC) to the Government, cumulative flow from beginning of calendar year;
  - Floor on gross tax revenue of central government, cumulative from beginning of calendar year;
  - Floor on priority social spending, cumulative from beginning of calendar year.
- Continuous targets include ceilings on:
  - accumulation of new external payment arrears from end-August 2015;
  - medium- and long-term non-concessional external debt contracted or guaranteed from end-August 2015;
  - short-term non-concessional external debt contracted or guaranteed from end-August 2015;
  - zero-ceiling on CBM buyback operations at non-market rates in the interbank foreign exchange market.
- Adjustor: budget support (external grants and loans) to government from bilateral and multilateral agencies, cumulative from beginning of calendar year.
- Program exchange rates (for accounting purposes) exactly as reported:
  - Malagasy Ariary (MGA)/SDR 3,761.88
  - U.S. Dollar/SDR 1.448699
  - Euro/SDR 1.187713
  - Australian dollar/SDR 1.774606
  - Canadian dollar/SDR 1.666667
  - Japanese Yen/SDR 173.119204
  - Swiss Franc 1.433198
  - U.K. Pound Sterling/SDR 0.932216

### Monetary and fiscal definitions and reference values (selected)
- NFA of CBM defined as gross foreign assets minus total foreign liabilities, all converted to SDRs at program exchange rates.
  - Reference at end-December 2014 (as reported):
    - Foreign Assets 2,013.221
      - Of which: Cash 0.048
      - Demand deposits 233.536
      - Term deposits and securities 1,489.464
      - Other foreign assets 290.173
    - Foreign Liabilities 624.150
      - Of which: Non-residents deposits 2.439
      - Deposits of international organizations 0.505
      - Use of Fund credit and loans 252.190
      - Medium-and long-term foreign liabilities (including SDR allocation) 369.016
    - Net Foreign Assets 1,389.071
- NDA definition and reference at end-December 2014:
  - Net Foreign Assets 1,389.071
  - Base Money 2,798.794
    - Of which: Currency in circulation 1,825.522
    - Currency in banks 169.994
    - Bankers’ reserves 801.531
    - Other deposits included in monetary base 1.747
  - Net Domestic Assets 1,409.723
    - Of which: Net credit to the central government 651.844
    - Credit to the economy 8.280
    - Net credit to depository corporations -24.000
    - Other items (net) 773.599
- NBC to the government reference at end-December 2014:
  - NBC to the Government was MGA 977.7 billion, of which MGA 651.8 billion from the central bank and MGA 325.9 billion from commercial banks.
- Government tax revenue reference:
  - For the year ending December 2014, government tax revenue was MGA 2,582.8 billion.
- Priority social spending definition: spending primarily related to nutrition, education, health, and provision of social safety nets, calculated as sum of spending related to (i) the Presidency; (ii) the Prime Minister’s Office; (iii) the Ministry of Finance and Budget; (iv) the Ministry of Health; (v) the Ministry of Population and Social Affairs; and (vi) the Ministry of National Education.
- Expenditure arrears definitions:
  - Expenditure arrears: payment obligations related to acquisition of goods and services by the central government liquidated and not paid after 90 days.
  - Arrears on VAT refund: eligible claims not paid after 60 days of presentation by the taxpayer.

### External debt and concessionality rules (selected)
- Concessional debt for monitoring: grant element of at least 35 percent, calculated as difference between nominal value and net present value (NPV) expressed as percentage of nominal value.
- Discount rate for NPV calculation: 5 percent.
- Debt definition: residency of creditor (per Guidelines on Public Debt Conditionality referenced).
- Variable-rate loan PV calculation: use program reference rate plus fixed spread specified in loan contract.
  - Program reference rate for six-month USD LIBOR: 3.85 percent (fixed for program duration).
  - Spreads reported:
    - Spread of six-month Euro LIBOR over six-month USD LIBOR is -296 basis points.
    - Spread of six-month JPY LIBOR over six-month USD LIBOR is -336 basis points.
    - Spread of six-month GBP LIBOR over six-month USD LIBOR is -145 basis points.
    - For currencies other than Euro, JPY, and GDP, the spread over six-month USD LIBOR is 0 basis points.
  - Where variable rate linked to a benchmark other than six-month USD LIBOR, a spread reflecting the difference between the benchmark rate and six-month USD LIBOR (rounded to nearest 50 bps) will be added.
- Program reference rate and spreads based on the “average projected rate” for six-month USD LIBOR over the following 10 years from the Fall 2015 World Economic Outlook (WEO).

*Republic of Madagascar / INTERNATIONAL MONETARY FUND (content unit: 32. National reconciliation calls for inclusive growth benefitting all citizens and all regions of Madagascar.)*

### 21.      A continuous ceiling applies to new nonconcessional external debt with nonresidents with

### _cr15325 - 21.      A continuous ceiling applies to new nonconcessional external debt with nonresidents with

### Continuous ceiling on new nonconcessional external debt (original maturities > one year)
- A continuous ceiling applies to new nonconcessional external debt with nonresidents with original maturities of more than one year contracted or guaranteed by the government or CBM.
- The ceiling covers debt and commitments contracted or guaranteed for which value has not yet been received.
- The ceiling also applies to private debt for which official guarantees have been extended and which therefore constitutes a contingent liability of the government or CBM.
- Exclusions from the ceiling:
  - (i) the use of IMF resources;
  - (ii) concessional debts;
  - (iii) debts incurred to restructure, refinance, or prepay existing debts, to the extent that such debt is incurred on more favorable terms than the existing debt and up to the amount of the actually restructured/refinanced/prepaid debt;
  - (iv) debts classified as international reserve liabilities of CBM.
- If the government has a special need for external nonconcessional financing, discussions with IMF staff should take place in advance to consider including the request in the program.

### Continuous ceiling on new nonconcessional short-term external debt (original maturities ≤ one year)
- A continuous ceiling applies to new nonconcessional external debt with nonresidents with original maturities of up to and including one year contracted or guaranteed by the government or CBM.
- The ceiling covers debt and commitments contracted or guaranteed for which value has not yet been received.
- The ceiling applies to private debt for which official guarantees have been extended and which therefore constitutes a contingent liability of the government or CBM.
- Exclusions from the short-term ceiling:
  - (i) concessional debts;
  - (ii) debts incurred to restructure, refinance, or prepay existing debts, to the extent that such debt is incurred on more favorable terms than the existing debt and up to the amount of the actually restructured/refinanced/prepaid debt;
  - (iii) debts classified as international reserve liabilities of CBM;
  - (iv) normal import financing. A financing arrangement for imports is considered to be “normal” when the credit is self-liquidating.

### Zero-ceiling on CBM buyback operations at non-market rates in the interbank foreign exchange market
- The Central Bank of Madagascar (CBM) ceased buyback operations at non-market rates in the interbank foreign exchange market on September 4, 2015.
- A zero-ceiling on CBM buyback operations at non-market rates is applicable since the point in time when the CBM declared that it had ceased such operations (September 4, 2015).
- For transparency and monitoring reasons, CBM will increase reporting of exchange rate data as described in Table 1.

### Data reporting and monitoring under the program
- Data listed in Table 1 will be provided for monitoring performance under the program based on data templates agreed with IMF staff.
- The best available data will be submitted so that any subsequent data revisions will not lead to a breach of indicative targets; all revisions will be promptly reported to IMF staff.
- For variables relevant for assessing performance against program objectives but not specifically defined, the authorities will consult with IMF staff on measurement and reporting.

### Key data reporting requirements (Table 1 highlights)
- Exchange rate data (Central Bank of Madagascar, CBM) — Daily, next working day:
  - Total daily CBM gross purchases of foreign exchange – break down by currency purchased
  - The weighted average exchange rate of CBM gross purchases, the highest traded exchange rate, and the lowest traded exchange rate – break down by currency purchased
  - Total daily CBM gross sales of foreign exchange – break down by currency purchased
  - The weighted average exchange rate of CBM gross sales, the highest traded exchange rate, and the lowest traded exchange rate – break down by currency purchased
  - Total CBM net purchases/sales of foreign exchange - break down by currency purchased
  - Total interbank foreign exchange transactions (net of CBM transactions) - break down by currency purchased
  - Total interbank and retail foreign exchange transactions (net of CBM transactions) - break down by currency purchased
- Monetary, interest rate, and financial data (CBM):
  - Foreign exchange cash flow, including foreign debt operations — Monthly
  - Stock of gross international reserves (GIR) and net foreign assets (NFA), both at program and market exchange rates — Monthly
  - Detailed composition of GIR, including currency composition — Monthly
  - Market results of Treasury bill auctions, including the bid level, bids accepted or rejected, and interest rates — Monthly
  - Stock of outstanding Treasury bills — Monthly
  - Data on the secondary market for Treasury bills and other government securities — Monthly
  - Bank-by-bank data on excess/shortfall of required reserves — Monthly
  - Money market operations and rates — Monthly
  - Bank lending by economic sector and term — Monthly
  - Balance sheet of BCM — Monthly, within two weeks of the end of each month
  - Aggregate balance sheet of deposit money banks — Monthly, within six weeks of the end of each month
  - Monetary survey — Monthly, within six weeks of the end of each month
  - Financial soundness indicators of deposit money banks — Quarterly, within eight weeks of the end of the quarter
- Fiscal data (Ministry of Finance and Budget, MFB):
  - Preliminary revenue collections (customs and internal revenue) — Monthly, within three weeks of the end of each month
  - Treasury operations (OGT) — Monthly, within eight weeks of the end of each month
  - Stock of domestic arrears, including arrears on expenditure and VAT refunds — Monthly, within eight weeks of the end of each month
  - Priority social spending as defined by the indicative target — Monthly, within eight weeks of the end of each month
  - Subsidies to JIRAMA’s suppliers — Monthly, within eight weeks of the end of each month
- State-owned enterprise data:
  - Data summarizing the financial position of JIRAMA and Air Madagascar — Quarterly, by the end of the subsequent quarter
- Debt data (MFB):
  - Public and publically-guaranteed debt stock at end of month, including: (i) by creditor (official, commercial domestic, commercial external); (ii) by instrument (Treasury bills, other domestic loans, external official loans, external commercial loans, guarantees); and (iii) in case of new guarantees, the name of the guaranteed individual/institution. — Monthly, within four weeks of the end of each month
- External data (CBM):
  - Balance of payments — Quarterly, by the end of the subsequent quarter
- Real sector and price data (INSTAT):
  - Consumer price index data — Monthly, within four weeks of the end of each month
  - Details on tourism — Monthly, within twelve weeks of the end of each month
  - Electricity and water production and consumption — Monthly, within twelve weeks of the end of each month
- Other data (OCH):
  - Petroleum shipments and consumption — Monthly, within four weeks of the end of each month

### Social spending table and reporting
- Table 2 reports Social Spending in 2015 and First Quarter of 2016 by Ministry, denominated in (Billions of Ariary).
- (Table entries preserved in the source; aggregated labels include Ministries: Presidency, Prime Minister's Office, Ministry of Finance and Budget, Ministry of Water, Sanitation and Hygiene, Ministry of Health, Ministry of Population, Social Protection and Promotion of Women, Ministry of National Education.)

### Guidelines on performance criteria with respect to external debt (excerpt)
- Definition of "debt" (excerpt from paragraph 8(a) of the Guidelines on Public Debt Conditionality in Fund Arrangements, Executive Board Decision No. 15688-(14/107), adopted December 5, 2014):
  - "Debt" means a current, i.e., not contingent, liability, created under a contractual arrangement through the provision of value in the form of assets (including currency) or services, which requires the obligor to make one or more payments in the form of assets (including currency) or services, at some future point(s) in time; these payments will discharge the principal and/or interest liabilities incurred under the contract.
  - Primary forms of debt include:
    - (i) loans, including deposits, bonds, debentures, commercial loans and buyers' credits, and temporary exchanges of assets equivalent to fully collateralized loans (e.g., repurchase agreements and official swap arrangements);
    - (ii) suppliers’ credits, where the supplier permits the obligor to defer payments until sometime after delivery of goods or services; and
    - (iii) leases, where debt is the present value (at inception) of all lease payments expected to be made during the agreement period excluding payments that cover operation, repair, or maintenance.
  - Arrears, penalties, and judicially awarded damages arising from the failure to make payment under a contractual obligation that constitutes debt are included as debt.

### Additional program and institutional details (selected figures and findings)
- CBM ceased buyback operations at non-market rates in the interbank foreign exchange market on September 4, 2015.
- Fund relations and financial position highlights (as of September 30, 2015):
  - Quota: 122.20 (SDR Million) — 100.00 percent of quota
  - Fund holdings of currency: 122.13 — 99.94 percent of quota
  - Reserve Tranche Position: 0.07 — 0.06
  - Net cumulative SDR allocation: 117.09 — 100.00 percent
  - Holdings: 59.05 — 50.43 percent
  - Outstanding purchases and loans:
    - RCF Loans: 30.55 — 25.00 percent of quota
    - ECF Arrangements: 24.75 — 20.25 percent of quota
- Latest financial arrangements (selected):
  - ECF Jul 21, 2006 – Jul 20, 2009: Amount Approved 73.32 (SDR Million); Amount Drawn 53.03 (SDR Million)
- Projected payments to Fund (SDR Million; based on existing use of resources and present holdings of SDRs):
  - Forthcoming: 2015, 2016, 2017, 2018, 2019
  - Principal: 10.61, 8.25, 5.89, 3.06
  - Charges/Interest: 0.01, 0.03, 0.03, 0.03, 0.03
  - Total: 0.01, 10.64, 8.28, 5.92, 3.09
- Implementation of HIPC Initiative (Enhanced):
  - Decision point date: Dec 2000
  - Assistance committed by all creditors (US$ Million): 835.75
  - IMF assistance (US$ million) (SDR equivalent in millions): 19.17 (14.73)
  - Completion point date: Oct 2004
  - Assistance disbursed to the member (SDR Million): 14.73
  - Interim assistance: 5.62
  - Completion point balance: 9.11
  - Additional disbursement of interest income: 1.69
  - Total disbursements: 16.42
- Implementation of MDRI:
  - MDRI – eligible debt (SDR Million): 137.29
  - Financed by MDRI Trust: 128.50
  - Remaining HIPC resources: 8.79
- Safeguards assessment for Banque Centrale de Madagascar (BCM):
  - Completed in January 2015; previous assessments March 2006 and September 2008.
  - Findings included: governance arrangements lacking adequate oversight (recommended establishment of an audit committee); BCM had significant outstanding claims on the government and was in a negative equity position compromising financial autonomy; key functions including internal audit should be modernized and BCM legal framework updated.
  - BCM has taken steps: publishing financial statements; technical assistance on legal framework; improving legal framework and internal audit functions; beginning implementation of International Financial Reporting Standards (IFRS).
- Exchange rate arrangement:
  - Currency: Malagasy ariary.
  - De jure exchange rate arrangement: free floating.
  - De facto exchange rate arrangement: classified as floating.
  - The exchange rate is determined in the official interbank market; CBM intervenes to smooth large fluctuations and meet foreign reserve targets.
- Debt sustainability analysis (excerpt):
  - Risk of external debt distress: Moderate
  - Augmented by significant risks stemming from domestic public and/or private external debt?: No
  - The increase in risk rating relative to the last DSA carried out in 2014 is mainly attributed to a significant nominal exchange rate depreciation.

*Source: Excerpted content from the IMF staff-monitored program documents for the Republic of Madagascar.*

### 2015.  The public DSA suggests that Madagascar’s total public and publically guaranteed

### _cr15325 - 2015.  The public DSA suggests that Madagascar’s total public and publically guaranteed

### Introduction and scope
- Joint DSA prepared by IMF and World Bank staff, based on the Joint Fund-Bank Debt Sustainability Framework for Low-Income Countries (November 5, 2013).
- DSA covers public debt and guarantees of the general government; excludes local government and state-owned enterprises debt except through direct guarantees.
- Debt measured on a gross basis; residency criterion used to split external and domestic debt.
- CPIA rating: Madagascar is rated as a ‘low’ performer. Indicative external-debt thresholds for this category:
  - PV of debt-to-GDP ratio: 30 percent
  - PV of debt-to-exports ratio: 100 percent
  - PV of debt-to-fiscal revenues ratio: 200 percent
  - Debt service to exports ratio: 15 percent
  - Debt service to revenue ratio: 18 percent
  - PV of total PPG debt threshold: 38 percent of GDP

### Recent developments and current debt situation
- Over 2008-14, domestic debt was the main driver of total PPG debt.
- Domestic debt: 7.3 percent of GDP in 2008, increased to 11.4 percent by end-2014 (includes domestic budgetary arrears which increased sharply in 2013).
- External PPG debt remained around 24 percent of GDP over 2008-14.
- Total public debt:
  - Around US $2.5 billion (33 percent of GDP) in 2007
  - US$3.5 billion (35 percent of GDP) in 2014
  - This remains substantially below the pre-HIPC peak of 95 percent of GDP.
- Debt service to revenue ratio has increased due to greater reliance on domestic financing and declining fiscal revenues.
- 2015 exchange rate effect:
  - Projected depreciation of 8 percent in the period average nominal effective exchange rate (22 percent depreciation against the dollar) expected to increase external debt by 6 percentage points of GDP.
  - Exchange rate base effects will further deteriorate debt-to-GDP ratio in 2016.
  - Nominal debt increased by a relatively modest 3 percentage points of GDP, largely offset by real GDP growth; larger than expected exchange rate depreciation is the primary driver of 2015 deterioration relative to 2014 DSA.
- Creditor composition (end-2014):
  - Total PPG debt: 3,574 US$m; 35.1 percent of GDP; 100.0 percent of total
  - Domestic debt, of which: 1,217 US$m; 11.4 percent of GDP; 34.1 percent of total
    - Treasury bills: 425 US$m; 4.0 percent of GDP; 11.9 percent of total
    - Debt to the Central Bank: 276 US$m; 2.6 percent of GDP; 7.7 percent of total
    - Arrears: 282 US$m; 2.6 percent of GDP; 7.9 percent of total
    - Other inc. loans: 234 US$m; 2.2 percent of GDP; 6.5 percent of total
  - External debt, of which: 2,357 US$m; 23.7 percent of GDP; 65.9 percent of total
    - Multilateral: 1,854 US$m; 18.7 percent of GDP; 51.9 percent of total
    - Paris Club: 107 US$m; 1.1 percent of GDP; 3.0 percent of total
    - Non-Paris Club: 380 US$m; 3.8 percent of GDP; 10.6 percent of total
    - Commercial: 17 US$m; 0.2 percent of GDP; 0.5 percent of total
- Private external debt:
  - Mainly issued by local subsidiaries of multinational companies.
  - Largest debtor: Nickel/Cobalt mine and processing facility with external debt of around US$2bn (21 percent of GDP), which increased total external debt from 24 percent of GDP in 2007 to 44 percent at end-2014.
  - Projected that this commercial loan will be fully repaid by around 2030.
  - External debt owed by domestically owned companies and households is negligible per authorities; comprehensive data on multinational subsidiary obligations is limited.

### Underlying assumptions
- Investment scale-up financed largely through concessional external borrowing and grants, with some non-concessional borrowing throughout the forecast horizon.
- Average grant element of new borrowing projected to decline from 40 percent today to around 30 percent in 2035.
- Assumptions are somewhat more conservative than the 2014 DSA.
- Main risks: weak revenue performance and low donor grant support (downside); upside potential from revenue mobilization which could increase debt-servicing capacity and donor support.
- Box 1 — Baseline Macroeconomic Assumptions (selected projections and comparisons with 2014 DSA):
  - Real GDP growth (percent):
    - 2015 DSA: 3.2
    - 2016: 4.3
    - 2017: 4.4
    - 2018: 4.5
    - 2019: 4.7
    - 2014 DSA for same years: 4.0, 4.5, 4.5, 4.5, 4.5
    - Medium term: stabilizes at 5 percent
  - Non-interest current account deficit (percent GDP):
    - 2015 DSA: 1.5, 1.5, 1.8, 3.1, 3.3
    - 2014 DSA: 5.4, 5.2, 5.0, 4.3, 3.9
    - Medium term: expected to stabilize at 3.0-3.5 percent of GDP
  - Primary deficit (percent of GDP):
    - 2015 DSA: 3.5, 1.9, 3.6, 2.9, 2.7
    - 2014 DSA: 1.4, 0.7, 1.4, 1.3, 1.3
  - Grants (percent of GDP):
    - 2015 DSA: 12.4, 13.5, 13.8, 14.2, 14.4
    - 2014 DSA: 15.0, 16.0, 15.7, 15.9, 16.3
    - Medium-term projection: grant support revised to around 2.5 percent of GDP per annum; long-run grants assumed to decline to 0.6 percent of GDP by 2035.
  - Non-Interest Expenditure (percent of GDP):
    - 2015 DSA: 2.1, 3.0, 2.6, 2.7, 2.4
    - 2014 DSA: 3.7, 3.7, 3.7, 3.7, 3.7
  - Total revenues (percent of GDP):
    - 2015 DSA: 15.9, 15.4, 17.4, 17.1, 17.1
    - 2014 DSA: 16.4, 16.7, 17.1, 17.1, 17.5
  - Revenues noted as a vulnerability: tax revenues fell from 12.1 percent of GDP in 2008 to 9.9 percent in 2014; path of revenue projected to rise at a modest pace.
  - Expenditure constrained by lower revenue projection; primary deficit expected to be higher in near term to accommodate scaling up of capital investment and social spending.

### External DSA (baseline and stress tests)
- Baseline:
  - Level of PPG external debt in 2014: a little over US$2.5 billion.
  - PPG external debt projected to increase from 24 percent of GDP in 2014 to peak at 34 percent of GDP in 2020, then decline to around 30 percent of GDP as domestic debt markets deepen.
  - PV of 2014 external debt: 13 percent of GDP; projected to increase to 20 percent by 2035.
  - Private external debt projected to decline slowly as mining project loans are repaid; DSA does not forecast substantial new external private borrowing.
- Alternative scenarios and stress tests:
  - Standard bounds test and a historical scenario (2004-13 averages) applied.
  - Standard bounds tests:
    - A one-time 30 percent depreciation shock would cause PV of debt-to-GDP to peak at 32 percent (above 30 percent CPIA threshold).
    - PV of debt-to-revenue would peak at just below 249 percent (threshold 200 percent) under the same shock.
    - The standard shock to exports also causes a breach for PV of debt-to-revenue.
  - Historical scenario:
    - Projects a rapid increase in all debt metrics and causes a breach for three of the five external debt thresholds.
    - Historical scenario driven by very large current account deficits in 2008 and 2009 (over 20 percent of GDP) related to large mining investment imports and non-debt-creating FDI; staff place less weight on this scenario as not representative of normal environment.

### Public DSA (baseline and stress tests)
- Baseline:
  - Domestic PPG debt as a proportion of GDP projected to decline over the next decade as authorities substitute away from local financing into concessional borrowing; domestic PPG debt expected to grow thereafter as domestic markets deepen.
  - PV of total PPG debt projected to remain around 25-30 percent of GDP throughout the forecast—below the PV total PPG debt threshold of 38 percent of GDP.
  - Weak revenue-to-GDP ratio increases vulnerability on the debt service to revenue metric; risk likely to increase through time as higher interest payments (from less concessional financing) may grow faster than revenue mobilization.
- Alternative scenarios:
  - All three alternative scenarios used to stress-test the baseline breach the risk threshold.
  - Scenario with the primary deficit unchanged throughout the forecast generates the highest debt-to-GDP trajectory.
  - Staff and authorities agree that reducing the current gap between revenue and spending is a priority.

*Prepared by the Staffs of the International Monetary Fund and the International Development Association; November 4, 2015.*

### CONCLUSION

### _cr15325 - CONCLUSION

### Authorities' stance and use of the DSA
- The authorities agree with the analysis presented in this DSA.
- The DSA was discussed with authorities during the September mission, and there was broad agreement on the risks to debt sustainability.
- The authorities have begun using the LIC DSA template to help develop their medium-term debt strategy and assess risks.

### Recommended reforms to enhance debt resilience
- i) increasing tax revenues to increase the capacity of the state to service debt;
- ii) ensure that debt continues to be financed on the most concessional terms possible;
- iii) ensure that investments are carefully prioritized to enhance growth and human capital accumulation;
- iv) improve debt monitoring capacity, especially in terms of controlling debt guarantees and potential contingent liabilities.

### Key recent developments and economic impacts (staff/authority narrative)
- Damages from severe weather are estimated to be equivalent to about 1 percent of GDP, with reconstruction costs projected at about 3 percent of GDP.
- Growth, projected previously to reach 5 percent in 2015, was revised downward to 3.2 percent.
- Transfers to JIRAMA (electricity and water public enterprise) were reduced from 1.7 percent of GDP in 2014 to 0.6 percent in 2015.
- The central bank stopped buyback transactions in the interbank foreign exchange market; the official exchange rate converged to the market rate after a depreciation of about 10 percent in September.
- From end-September to November 10, the central bank made cumulative purchases of foreign exchange in the market of about US$18 million, in keeping with its objective of gradual reserves accumulation.
- The authorities requested an immediate support from the Fund in the form of a disbursement under the RCF in an amount equivalent to 25 percent of quota.
- The RCF will be accompanied by a 6-month Staff-monitored Program (SMP).

### Fiscal and policy response in 2015 and program outlook for 2016
- Fiscal measures taken in 2015 included: strengthening tax and customs administration; reducing fuel subsidies; cleaning up the civil service payroll; achieving some cost-savings on current spending; deferring non-priority capital spending.
- These measures yielded significant savings and helped contain the increase in the fiscal deficit; the fiscal deficit is projected to increase only slightly in 2015 compared to original projections.
- Tighter than expected financing conditions affected arrears clearing plans; negotiations have started with creditors to settle arrears through the use of treasury bills.
- The draft revisions to the 2015 budget and the draft 2016 budget were submitted to parliament on October 30; the draft 2016 budget law provides for the setting up of an escrow account at the Central Bank for the reimbursement of VAT refunds starting in January 1, 2016 (structural benchmark).
- The policies envisaged under the SMP aim at addressing fiscal weaknesses, preserve macroeconomic stability, support better governance and build the foundations for sustainable growth; the program is consistent with the authorities’ National Development Plan (NDP) covering 2015-19 and the Presidential Plan of Urgent Action (PPUA) for 2015.

*Source: CONCLUSION, _cr15325.*

### 16. For 2016, absent any major shock, the economy is projected to grow by 4.3 percent,

### _cr15325 - 16. For 2016, absent any major shock, the economy is projected to grow by 4.3 percent,

### Macroeconomic outlook
- Real GDP growth for 2016 is projected at 4.3 percent, mainly on the basis of higher agricultural production, a recovery in textiles export and tourism and some infrastructure investments.
- Inflation is projected to remain at around 7 percent.
- The fiscal deficit is projected to be reduced to 3.2 percent of GDP.
- The authorities expect an increase in the level of international reserves.

### Fiscal sector — 2016 Budget and revenue measures
- The 2016 Budget envisages an increase in revenue equivalent to about 0.6 percent of GDP (including a one-off operation for the regularization of tax arrears of Air Madagascar) and better prioritization of expenditure.
- Fiscal deficit on a commitment basis in 2016 is budgeted to decline to 3.2 percent of GDP.
- Revenue-enhancing measures include:
  - new measures to improve tax administration, strengthened efforts to ensure compliance, measures to reduce fraud, and elimination of some exemptions;
  - a uniform ten percent excise duty on all imported new vehicles;
  - an increase in excise duties on alcoholic beverages and soft drinks;
  - a tourist arrival fee, among others.
- Expenditure measures include:
  - elimination of fuel subsidies;
  - continued process of cleaning the government’s payroll;
  - reduction of transfers to loss-making enterprises.
- Expected reallocation: reduction in subsidies for fuel and to state enterprises will enable an increase in expenditure in priority areas such as agriculture, education, health and infrastructure.

### Arrears and public financial management
- Authorities are developing a framework, based on IMF technical assistance recommendations, to prevent new arrears and settle the existing stock, including arrears related to VAT refunds.
- Starting in January 2016, an escrow account will be created at the central bank to ring fence the resources required for VAT reimbursement.
- With African Development Bank support, a PFM reform strategy for 2016-20 is being developed.

### State-owned enterprises reform
- Priority SOEs: JIRAMA and Air Madagascar.
- JIRAMA measures:
  - consultant hired to develop a management improvement plan including organizational restructuring;
  - on-site audits of the largest users (1000) have started;
  - exploring advanced metering for new customers to minimize losses;
  - steps to reduce costs including rehabilitation of heavy fuel oil generating units and auditing supplier contracts.
- Air Madagascar measures:
  - management and Board replaced;
  - new team working with the World Bank to contract external expertise to restructure the company and develop a new business plan under a new Chairman.

### Monetary policy
- The central bank will pursue a prudent monetary policy aimed at keeping inflation at around 7 percent, maintaining a flexible exchange rate and improving the level of international reserves.
- Instruments and operational measures:
  - use of Treasury bill sales and weekly deposit auctions to achieve liquidity targets;
  - reference interest rate will be allowed to fluctuate more and reflect movements in the money market.
- Institutional and governance reforms:
  - a revised Central Bank Act will be submitted to the Cabinet for approval before the end of the year; it includes clauses providing for an effective mechanism for the automatic transfer of central bank losses and profits to the government; a phased reduction of statutory advances from the central bank; and establishment of an Audit Committee of the Board of Directors.
  - all outstanding central government obligations owed to the central bank will be settled through issuance of interest-bearing instruments.

### Financial sector reforms
- Reform will continue pending completion of the Financial Sector Assessment Program (FSAP); an action plan will be finalized thereafter.
- Interim steps include:
  - improving supervision of foreign-owned banks;
  - finalizing the law regulating mobile banking;
  - completing the revision of the Financial Sector Law, including the establishment of a stock exchange in 2016.
- Authorities are working with the World Bank to reform and strengthen supervision of the microfinance sector.

### Medium-term objectives and investment strategy
- Over the medium term the objective is durable poverty reduction with strong, sustainable growth in a stable macroeconomic environment.
- Policy priorities include national reconciliation, institutional strengthening, governance improvement, and creating a conducive environment for private sector development.
- Infrastructure: a very large need exists but resources are limited; authorities are developing a carefully prioritized plan of the most important projects and exploring all financial options, including Public-Private Partnerships (PPPs).
  - A number of potential PPP projects have been identified.
  - A policy and legal framework for PPPs is under preparation and expected to be enacted by year-end to minimize budgetary risks.
- Anti-corruption: a national strategy against corruption has been put in place and budget allocation has been increased for agencies dedicated to the fight against corruption.
- Additional measures in the MEFP will be implemented gradually over the medium term.
- Authorities expect additional financial assistance from developing partners at the Donors’ Conference planned early next year, with the RCF playing a catalyzing role.

### Conclusion and request
- The measures described in the Memorandum of Economic and Financial Policies demonstrate the authorities’ commitment to address the country’s constraints and pursue reforms to improve the economic and financial situation and place the country on a strong and sustainable growth path.
- Authorities request Directors’ support for their request under the RCF.

*Source: _cr15325 - 16. For 2016, absent any major shock, the economy is projected to grow by 4.3 percent,*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15325.pdf_